Tuesday, June 5, 2018

Credit market access for low income countries, but at what cost?

One of the main objectives of international development agenda has been to enable greater access to private capital for low income countries. Though the headline objective has been achieved, the unintended consequences appear to be not very benign. The IMF's latest Fiscal Monitor has some very interesting snippets on this.

Diversifying away from multilateral and bilateral aid, low income countries have been able to increase their access to non-concessional private sources. Market access has been realised...

... and non-concessional lending takes up the dominant share of borrowings in some of the largest low-income countries.

But this trend has coincided with interest expenditures touching the highs prior to the debt-forgiveness initiatives of the early noughties...

... and indebtedness is slowly climbing back to the pre-debt relief times.

All this has squeezed public investment, thereby imperilling future growth.

This could not have been any different. These low-income countries struggle with weak state capacity, very low and stagnant domestic tax revenues, pervasive macroeconomic instability, and very corrupt governments. They have very limited capacity to absorb commercial capital and generate the necessary returns (in terms of economic output growth) to be able to service the high cost debt. The infamous $850 m Tuna Bonds issued by Mozambique ostensibly to promote fishing is only the most egregious example.

It is only a matter of time before we will have the need for another round of debt reduction initiative. The only difference being that this time it would involve private creditors and not governments, and why should the former play ball in the name of development? And unlike Argentina, these small and far less powerful countries would be at the mercy of distressed asset vultures like Elliot Capital Management. Heck, when even Greece could not get any meaningful debt reductions, how could we expect Congo or Zimbabwe to swing something better?